Subway franchisees in California, already worried that high operating costs in the state are leaving much of the base at risk, are working on strategies to adapt to the oncoming reality of a $20-per-hour minimum wage for fast-food chain restaurants.
The company has formed a committee of operators to examine strategies for adapting to that minimum, which many worry will lead to a large number of closures.
The measures go beyond simple price increases and include recommendations for cost reductions and potential breaks from the franchisor, sources told Restaurant Business.
“There is no way anyone is going to pay $17 for a sandwich,” one operator said, speaking on the condition of anonymity.
In a statement, Subway confirmed the committee’s work. “The Subway corporate team suggested establishing a California Subway Franchisee Task Force to explore opportunities and solutions to help local California franchisees protect their business in light of the significant minimum wage increase in April,” the company said in an emailed statement to Restaurant Business.
“In fact, this week the task force held a productive meeting with Subway corporate members and Subway franchisees from across the state, focusing on ways to support the growth of their businesses.”
California come April will require fast-food chain restaurants with at least 60 national locations to start paying a minimum of $20 an hour, the first such rule of its kind in the country. The rule has generated considerable consternation, particularly among franchisees in the state, who worry about the impact of paying a much higher wage rate without a corresponding sales increase that often comes with broad increases in the minimum wage.
It’s no small matter for Subway, which operates about 20,000 U.S. locations, including more than 2,000 in California. Only Starbucks, with 3,000 California units, operates more there, according to data from Restaurant Business sister company Technomic.
Many of those stores are struggling as it is, according to multiple operators, one of whom suggested more than half of the state’s franchisees are at risk.
Subway operates restaurants with low unit volumes. While they in theory can be profitable, it hasn’t kept stores from closing. About 7,000 Subway locations have closed since 2014, based on Technomic data.
In addition, the company itself has started to require franchisees accept digital coupons. Subway has argued that accepting those coupons helps drive business to its mobile app and loyalty programs, which are important, sales-driving initiatives. But operators say the discounts are too aggressive and sap into their profits.
Franchisees in the committee have asked the company for some concessions in their requirements. For instance, they’ve asked for breaks on remodels, according to sources. And they’ve asked that the company ease a requirement that they be open 91 hours per week—a national requirement that means they must open in the mornings. “We haven’t marketed breakfast in eight years,” one operator said. “Why are we open for breakfast?”
Franchisees, however, said they haven’t been able to convince Subway to agree to those concessions.
Subway is hardly the only brand looking for solutions in California. Several brands with a heavy presence there are looking at strategies for adapting in the state. Price hikes are likely the most common strategy. But technology is another one—kiosks are expected to be far more common in the state—while brands could look at cost cuts and other efficiencies.
“We have a really strong plan to address it,” Jack in the Box CEO Darin Harris said at the ICR Conference earlier this month.
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